A trading plan is a systematic method of identifying, buying, and selling, which takes the time, goals, and risk tolerance of the trader into account. A trading plan specifies how to find and complete trades. In other words, a trading plan shows how the trader performs in different financial markets. To achieve goals and succeed in trading, having a plan is essential. Once a trading plan is written, it can be re-evaluated and adjusted according to market changes.
Uses of a Trading Plan
A trading plan is a tool for making decisions about your trading activities. This is because you, as a trader, should make decisions for your capital in a short amount of time. Having a written and detailed trading plan is an important step toward success in your financial activities. Before trading, you should write pre-trade and post-trade decisions to help you decide on what, when, and how much to trade. Having a trading plan that’s unique to you is essential and you should avoid blindly listening to the advice of other people. You can, however, use others’ plans as a guide for making your own trading plan.
It’s better to ask yourself the following questions before writing your own trading plan:
- What are your short-term and long-term trading goals?
- What is your goal in a transaction?
- How much is your capital in a transaction?
- What is your attitude towards risk in a transaction?
- What are the financial markets in which you’re willing to complete the transaction?
- How do you enter and leave a transaction?
Why do you need a trading plan?
Most experts recommend not entering financial markets before you have a trading plan. As a trader, a trading plan helps you make logical decisions while trading. This plan should be in writing as your decisions may change at any moment because of your feelings.
The Benefits of Having a Trading Plan
- A trading plan makes trading easier than trading without a plan.
- It’s like a roadmap for how to trade. No trade should be done without a detailed plan.
- With a robust plan, you can identify your loss and profit in advance and manage your emotions and feelings.
- All of the planning is done in advance, making the transaction smoother.
- By sticking to your plan, you can avoid losing your assets.
- Following a trading plan helps limit mistakes and minimize loss when trading.
How to Setup a Trading Plan
Trading plans are not similar because traders have different Forex trading strategies. To create a trading plan:
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Assess Your Skill
The first question you should ask is are you ready to trade? Do you follow your signals without hesitation?
Trading in financial markets is like a battle. The details of your trading plan will be affected by the financial market changes in which you intend to trade. It’s clear that the trading plan should be different for each financial market. First, assess your knowledge and skill in various fields and gather as much information as possible about the things you want to trade. Then, consider all the information such as market fluctuations, closing and opening time of the market, and the profit in each price movement.
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Determine the Profit-to-Risk Ratio
Whether you want to take risks in trading depends on your trading style and risk tolerance. Risk tolerance differs in each person. Before you start trading, it’s better to determine the level of risk you’re willing to take for individual transactions as well as in total. Determining the scope of the risk is very important. Being careful and cautious when trading is better than failure and it should be your first goal as a newbie trader.
Making profits may be tempting, but if you don’t create clear and specific trading plans, and if you’re not disciplined enough to follow them consistently, you will have trouble earning money as a trader. Keep in mind that you can control your risk by limiting losses.
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Have a Specific Goal
Before entering a trade, determine your goals such as profit and risk ratio. Many traders won’t trade unless the profit is at least three times greater than the risks. Determine your daily, weekly, monthly, and annual profit goals and evaluate them regularly. Additionally, specify what type of trader you are.
Whatever trading plan and system you use, mark major and minor support and resistance levels on charts and set notifications for when to enter and leave. Then ensure that all signals can be viewed or identified easily via a clear signal.
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Set the Entry and Exit Rules
Most traders make the mistake of focusing most of their efforts on looking for buy signals while paying little attention to when and where to leave/exit. Clearly, most traders cannot sell when the price drops as they don’t want to suffer losses. Unless you learn to accept loss, you will not succeed as a trader. Professional traders lose more trades than they win, but they still manage to make a profit by managing their money and limiting their losses. Before entering a trade, you should know the exits and the potential loss.
There are at least two exits in each transaction. First, if the trade ends up with your loss, how much is your loss limit? Second, every trade should have a profit goal. Once you get there, you can sell some of your assets and if you want, you can move your loss limit to the Breakeven Point (BEP). Remember that exits are much more important than entries.
Key Notes
- A trading plan must be unique to you.
- A trading plan can be re-evaluated and is adjustable according to market changes.
- A trading plan takes the trader’s personal goal into account.
- Knowing when to leave a trade is as important as knowing when to enter it.
- Stop loss prices and profit points should be added to the trading plan to determine the exit points for each trade.
- Write your own trading plan and update it as you learn more about the market.
Trading System vs. Trading Strategy
A trading system shows how to enter and exit transactions.
A trading system is a part of your trading plan. It’s only one of the several important parts of the plan (i.e. analysis, implementation, risk management, etc.). Most traders use a trading system to determine when to buy or sell a stock. Since markets are ever-changing, a good trader usually has two or more trading systems in their trading plan. Two things should be considered in a trading system. First, what is the general trend of the market? Second, when should you enter the market?
A trading strategy consists of tested and proven methods. A strategy is like a trading manual that clearly shows the specifics of entry or exit to the trader.
Conclusion
All of us are at different stages of life and have different thought processes, risk tolerance levels, market experience, and views towards the market. Have a trading plan of your own and constantly update it as you learn more about the market. Be disciplined when it comes to trading and limit your mistakes as much as you can.
One of the most important factors for successful trading is having a robust and suitable trading plan. A trading plan is an all-purpose tool that helps the trader have a profitable trade.
Factors such as the trader’s motivation to enter a transaction, the amount of time required to allocate to the transaction, the trader’s goal of the transaction, profit-to-risk ratio, the capital required for the transaction, the trader’s knowledge and skills in the market and recording information, are all part of a good trading plan. After all, if you’ve failed in planning, then you’ve planned to fail. When it comes to money, your emotions and feelings can influence you and make you make irrational decisions, even though you don’t want that to happen. The best way to avoid something like that is to minimize losses by having a plan for each trade. A plan in which every action is defined, so you don’t need to make hasty decisions. Simply stick to your trading plan.